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Can LabCorp (LH) Surprise this Earnings Season?

Laboratory Corp. of America Holdings (LH), popularly known as LabCorp, is expected to release its second-quarter 2014 results before the opening bell on Jul 18. Last quarter, LabCorp posted a negative earnings surprise of 5.63%. The four-quarter trailing average miss is pegged at 1.89%. Let’s see how things are shaping up for this announcement.

Factors at Play

The current economic uncertainty continues to adversely affect LabCorp. The challenging volume environment for testing laboratories and utilization weaknesses pose as looming headwinds. Although in the last reported quarter, volume increased 2.6% (on a per day basis), organic volume growth was low. Moreover, we are concerned about the Medicare payment reductions and the implementation of sequestration.

Although share repurchase activity provided some cushion for the company, the bottom-line results in the last reported quarter failed to boost confidence. Margins also remain under pressure. Moreover, the poor outlook for 2014 implies that the industry trend does not seem likely to improve in the near future.

Nonetheless, LabCorp is leaving no stone unturned to consolidate operations and realize potential synergies. As part of its 5-pillar strategy, LabCorp is currently working hard on new innovations with academic institutions in order to capture the growing lab testing market with its advanced assays and tools. Despite the near-term challenges from reimbursement issues, the company is working on portfolio expansion to drive its top line. LabCorp is focusing more on the high-margin esoteric testing business, which is expected to contribute 45% of total sales in the next 3–5 years.

Further, LabCorp has strengthened its foothold in the diagnostics space through both organic and inorganic means and plans to collaborate with leading companies and academic institutions to provide a wider portfolio of tests. In addition, the acquisition pipeline remains attractive.

Earnings Whispers?

Our proven model does not conclusively show that LabCorp is likely to beat earnings this quarter. It is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: LabCorp’s Earnings ESP is 0.00%, since the Most Accurate estimate of $1.77 is on par with the Zacks Consensus Estimate.